It all started with a Tweet…
A while back Elon Musk arrived in a spot of bother with the SEC for Tweeting that he was considering to take Tesla Motors private.
The SEC took offense to Elon's use of the phrase funding secured. The SEC felt that Elon's handshake deal with the Saudi sovereign fund that he was refuring to was not concrete. Morever they objected to Elon's method of distributing material information to shareholders via Twitter.
Although there were some questions around wether the SEC had a legitimate case ultimately Elon decided to settle with them. This settlement would include some form of oversight Elon's tweets regarding Tesla Motors. All seemed well; Tesla went back to making cars, the media went back to making a big deal out of other things.
Only a few months later we find ourselves in another interesting legal battle between Elon and the SEC. All over another tweet…
Contrary to what most people think the SEC isn’t upset that Elon musk disclosed a number he shouldn’t have. Even the SEC agrees that the tweet did not contain any “material” information. Or in other words, he didn’t say anything wrong. What they object against is that Elon didn’t get written consent from Tesla to verify that this tweet indeed did not contain any “material” information.
Elon/Tesla’s argument is that there is no need for such approval as per the terms of the settlement. And that even if it did have such terms they would be unconstitutional. In other words; Elon is free to tweet whatever he wants but if he tweets something with material information he needs prior approval. That leaves the case of “did he tweet material information” as something for courts to interpret in the case of a dispute, not something he needs written consent for every time he wants to Tweet something.
Let's start by saying that Elon already has an amazing lawyer. If you read the argument they put forth in the 30-page response to the Courts you’ll see that they present a very broad argument that tries to attack the claim from as many angles as possible.
So obviously we’re not naive enough to think that we can provide any better argument. But when we ran the SEC settlement through Donna we did however find some interesting other points that weren’t mentioned in the response.
In particular, …we found some bugs 🐛. They’re small but could present a real headache for the SEC when it comes to enforcing their idea of what the agreement should do. That is because the agreement was drafted by the SEC and as such a judge would likely apply Contra Proferentem (i.e. give Elon the most beneficial interpretation if considered reasonable).
So we thought we’d present a few of these bugs here. Partially because I wanted to show how small mistakes (even typos) can have huge legal implications, and partially because I would love feedback from the community and real lawyers.
Disclaimer: I’m not a lawyer myself so the things I present here could be 100% wrong. So if you don’t agree, please leave a comment and we can update the post.
But for now, download the Settlement Agreement via this link, make a cup of tea ☕️, and continue reading 🤓
Problem 1. They Forgot to Reference an Important Clause
So the bulk of the SEC’s punishment is set out in Clause 5. Here they make three statements
c. If we remove the legalese they essentially say the following:
aThat Elon must step down as chairman in a certain timeframe.
bthat Elon must comply with Tesla’s procedures to verify the correctness of material information that he discloses
cthat, and here I will quote “certify, in writing, compliance with undertaking
aset forth above.”
In the SEC’s argument, they bring forth that Tesla did not provide a written certification and evidence to support that Elon complied with Tesla’s. Elon’s lawyer argues that they were given an unreasonably short timeframe, but from these clauses, it’s not clear that they actually have to provide any such certification! Because the certification only applies to (a), which is that Elon undertakes to step down as chairman. Oops?
Problem 2. Elon’s Babysitting Only Applies to Written Information
Again in Clause 5 we find another interesting detail.
comply with all mandatory procedures implemented by Tesla, Inc. (the “Company”) regarding (i) the oversight of communications relating to the Company made in any format, including, but not limited to, posts on social media (e.g., Twitter), the Company’s website (e.g., the Company’s blog), press releases, and investor calls, and (ii) the pre-approval of any such written communications that contain, or reasonably could contain, information material to the Company or its shareholders; and
They say that (i) Tesla must oversee all communications, but that Elon only needs pre-approval for written communications. In other words, if Elon discloses new material information in an earnings call (i.e. non written) he doesn’t actually need Tesla’s pre-approval!
So Elon…here’s a top tip: say things to reporters and get them to write it down! 😉
More than that we also see the other argument Elon’s lawyer is making, namely that Elon only requires pre-approval for “communication that contains material information”, he doesn’t need pre-approval for communication in general. Wether communication contains material information or not isn’t for Tesla to decide, and therefore the lawyers argue, subject to Elon’s constitutional rights of free speech.
Problem 3. Sloppy Writing
To me, it seems that the SEC wrote the agreement in a hurry. The nice thing about this document is that you both get to see the SEC’s original document as well as the court’s final judgment. When you compare the two you see that the Court had to correct the language in several places because it just didn’t make sense.
For instance, the SEC wrote:
To preserve the deterrent effect of the civil penalty argue that he is entitled to, …
Which the Court changed to:
To preserve the deterrent effect of the civil penalty, Defendant shall not argue that he is entitled to …
To me, that looks like that at some point they had a list of obligations on Elon’s part that they combined into one sentence but forgot to check the grammar. In this case, the Judge’s order will prevail but this could have been a problem if there had only been an agreement.
Those were just some of the initial things we found. Again, I’m not a lawyer and we’re still running more in-depth analysis especially in the other documents surrounding this case. But I hope that it at least was interesting to some of you that wanted to dive a bit deeper than most media headlines.